By now Sequoia’s “RIP” slide deck and the ensuing blog coverage have been consumed by every entrepreneur and investor in the tech universe. It hit a nerve. Perhaps it provided a wake-up call, or simply confirmed people’s worst fears. For first-time entrepreneurs, or for those who have forgotten what happened just seven or eight years ago, this sort of shock therapy could be effective.
But the bottom line is that it is superbly hard, even in good economic times, to really impact the world with an innovative new product from a small company. The odds are hugely stacked against you. Would-be entrepreneurs and investors alike tend to forget this. They grow complacent when they are bailed out of mediocre situations or make money far exceeding what they deserve. They begin to believe their own BS. A troubling sense of entitlement lulls them into a false sense of security that they are not actually fighting for their economic lives, every minute of every day. It happened during the dot-com bubble and the housing boom, and now it’s happening on Wall Street.
The truth is, founders should be ruthlessly hard on themselves irrespective of the economic climate. Treat every break you get as the last miracle left on Earth. You should always be asking yourself: What could be done better? What’s not working? How can we be more capital efficient?
Any entrepreneur who woke up this morning and said, “Hey, I found $200,000 that I can cut out of my burn rate,” should be taken out to the woodshed. The fact is, cutting fat should be a standard operating procedure, not a reaction to a financial crisis. A knee-jerk reaction can also cut too deep, stalling innovation and growth, with the same inexorable end: failure. The same is true for VCs. Investors cannot afford to be intellectually lazy in easy times, only to wake up surprised by a changed environment and reactively change their investment tone.
You need to build your business, or your portfolio, based on underlying fundamentals that will carry you through good times — and bad.
Here are a few things I think all entrepreneurs should do now:
1) Reaffirm the value-creating milestones for your business.
2) Focus your capital on hitting them in the most efficient way possible.
3) Ensure that your current cash is safe. Is it invested in stable corporate bonds (like GE)? Or is it sitting in financial institutions, even the finance arms of manufacturing companies (like GMAC)? Are your lenders likely to deliver money they have agreed to lend? Do your investors have reserves for future rounds?
4) Look at your burn rate to make sure current expense rates still make sense. This has more urgency for later-stage companies that are selling a product, but those in R&D mode should always be thrifty.
5) Lead. Reaffirm the viability and vision of your company to the troops. This will counterbalance people’s tendencies to worry about their jobs and dreams, even decrease the time spent watching stock tickers.
Although it is too soon to tell what the true extent of the recent weeks’ turmoil will be, the secondary effects of this crisis will likely prove worse for entrepreneurial companies. Between skittish customers and the herd mentality that often manifests itself in the venture community, the startup jungle will certainly be a less forgiving ecosystem for awhile.
However, while funding will be harder to come by, there will continue to be capital available for really great companies and good ideas. Keep in mind that many of our greatest companies were founded during, or toward the end of, recessions, among them IBM, Hewlett-Packard and Microsoft.